5G Wireless Is Not Profitable When the Wired, State-Based, Utility Cross-Subsidies Are Removed.

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On September, 26, 2018, FCC Commissioner Brendan Carr will present a plan for deploying 5G, which claims that rural areas will benefit and that federal actions are needed to help create billions in investments.

“And yet still too many communities, especially in rural America, feel that they may be left behind. Their elected leaders have called on the FCC to act because they are concerned that, without federal action, they may not see 4G, let alone 5G service. They worry that the billions of dollars of investment needed to deploy next-gen networks will be consumed by high fees and long delays in big, ‘must serve’ cities.”

This plan appears to be based on model legislation that has been developed at the American Legislative Exchange Council, ALEC.

Elsewhere, the FCC claims that it needs to preempt state and city regulations, and to speed up the retirement of the aging, legacy, copper-based utility networks.

Ironically, the FCC has failed to examine that many of these rural communities are served by a state telecommunications utility(s), and in most states, as we uncovered, there has been a massive FCC-based cross-subsidy scheme where local phone customers were charged extra to fund the companies’ other lines of business, including the wireless networks, over the last decade. To add insult to injury, these cross-subsidies and previous ‘deregulations’ should have been used to deploy broadband to rural areas since the 1990’s, instead of paying for wireless or the purchase of AOL or Time Warner or…

Equally ridiculous — 5G Wireless will require a fiber optic wire as it only has a range of a city block or two. Simply go into a rural area and take out a long tape measure and mark off 1000 feet.

In fact, on Sept 12th, 2018, the Wall Street Journal reported that the range of 5G is “up to 1000” feet.

“What 5G Will Mean to Consumers — and When

“True high-bandwidth 5G towers can only deliver service up to 1,000 feet. 5G waves also can have difficulty penetrating walls and windows, and…”

Tying some of the previous articles together with this upcoming FCC raid on the public interest, we will show how wireless has been cross-subsidized by the state utilities. Take that away and the 5G plan falls apart — but it also opens a host of questions about customer overcharging as well as returning billions per state to properly upgrade the infrastructure of the states’ municipalities.

NOTE: We focus on AT&T, Verizon and CenturyLink, which were created out of the original Bell companies as well as other local, long distance and US wireless companies, all merged into 3 mostly non-competing, (for wired broadband) primary US holding companies. And we focus on Verizon NY because it is the only state-based telecommunications utility we know of that is required to file a public annual report. Also, the FCC stopped publishing “The Statistics of Common Carriers”, in 2007, which supplied the financial information about the other state utilities of AT&T, Verizon and CenturyLink. It was first released in 1939.

By the Numbers:

1) Wireless Deployments have been Cross-Subsidized by Wireline Customers.

Verizon’s former CFO, Fran Shammo, stated in a 2012 investor meeting that the wireline networks were funding wireless deployments.

“The fact of the matter is Wireline capital — and I won’t get the number but it’s pretty substantial — is being spent on the Wireline side of the house to support the Wireless growth. So the IP backbone, the data transmission, fiber to the cell, that is all on the Wireline books but it’s all being built for the Wireless Company.”\

Verizon Wireless is a D/B/A for ‘Cellco Partners” and it is a separate subsidiary. Verizon NY is a state-based telecommunications utility, and Verizon’s networks are really based on the state-by-state utility wireline infrastructure (in region). Verizon Wireless is supposed to pay the utilities back for the construction, like any other company. For the most part, based on the financial reports, that didn’t happen. (We discuss the out-of-region deployments elsewhere.)

2) The New York AG in 2011 Found 75% of the Utility Construction Budgets were Cross-Subsidizing the Other Businesses, Including Wireless.

In 2011, Verizon NY stated that the company spent over $1 billion on the utility capital investment. The NY Attorney General claimed this was misleading, as the money had been shifted to fund Verizon Wireless and FiOS TV.

“Verizon NY’s claim of making over a ‘billion dollars’ in 2011 capital investments to its landline network is misleading. In fact, roughly three-quarters of the money was invested in providing transport facilities to serve wireless cell sites and its FiOS offering. Wireless carriers, including Verizon’s affiliate Verizon Wireless, directly compete with landline telephone service and the company’s FiOS is primarily a video and Internet broadband offering.”

Again, the utility construction budgets are NOT supposed to be used for a video TV service or given to the wireless company. Unfortunately, the State AG never connected the dots to stop this practice.

How much are we talking about?

3) Verizon NY Local Service Paid the Majority, $1.2 Billion, in Construction & Maintenance Expenses, in just 2017.

The Verizon NY 2017 Annual Report, published in June 2018, shows that copper-based “Local Service” brought in $1.1 billion, but it was charged $1.2 billion in Construction & Maintenance (known in the industry as “Plant” and “Non-specific plant”). These excerpts are from actual financial reports, not make believe statistics.

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“Local Service” are mostly the basic, “POTS”, “Plain Old Telephone Service” networks; wires that are part of the state utility and they are classified as “intrastate” services.

4) Business Data Services (Special Access) have High Profits from Cross-Subsidies.

“Access Services” are also part of Verizon NY and are classified as “interstate” services and had $2.4 billion of revenue, with the majority, almost $2 billion, for “Business Data Services”. However, Access paid only $600 million in Construction & Maintenance. Also known as “Special Access” or “backhaul”, these are the wires and/or services used by businesses, such as banks, and are also the wires to the cell sites and competitors.

Why are Business Data Services paying less than half of the construction expenses but have more than double the revenues? Moreover, Local Service hasn’t had any serious construction or maintenance of the copper-based wires for over a decade.

Overall, Verizon “Local Service” lost $2.9 billion in 2017, while Access had a profit of $354 million (but this is only one part of the access revenues and profits.)

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When competitors or companies rent the networks, Verizon has them coming and going — paying inflated prices for using the networks. Elsewhere we show that Verizon’s own wireless subsidiary has been paying a fraction of the ‘market prices’ that are paid by other carriers, such as Sprint.

How much should the Local Service budget be?

5) Verizon NY’s Local Service Copper Construction & Maintenance Was Only $50–125 Million Since at Least 2010.

Starting in 2015 and based, in part, on our research, there has been an investigation of Verizon NY by the NY State Public Service Commission with the Communications Workers of America (CWA) and it was settled in July 2018.

The testimony found that the copper-wired services were deteriorating and that the company was spending around $50-$125 million a year. (This is an estimate based on some of the related public details discussing this issue.)

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Again, how was Local Service charged over $1 billion extra for construction expenses that it never used? And why did the Access services get a free ride, paying a fraction of these construction expenses?

This gets much more twisted. The FCC claims that it only cost $45–50 a YEAR to maintain the copper — and that this is a burden on Verizon! You can’t make this stuff up.

6) The FCC claims that it only costs $45–50 a YEAR to maintain the copper.

FCC Chairman Ajit Pai is removing regulation to stop spending money on ‘copper networks’.

“The FCC has adopted many reforms along those lines in order to help promote network buildout. For example, we’ve modernized our regulations to make it easier for carriers to stop spending money to maintain yesterday’s copper networks and start building or expanding the fiber networks of tomorrow.”

According to the FCC, it only costs $45-$50 per home passed per year to maintain the copper networks. In this comical statement, the FCC claims that if Verizon retired the copper networks as planned, the company could save $171 million to $190 million.

“The record shows that the burdens caused by delays in copper retirements resulting from expansive notice obligations can be quite significant, including costs associated with the ongoing need to maintain various parallel computer systems and retain dedicated engineering staff. Indeed, record evidence suggests savings of $45-$50 per home passed per year achieved by retiring copper facilities. Couple that with Verizon’s statement that it has filed to retire copper facilities at 3.8 million locations, and it appears that Verizon’s copper retirements alone may result in between $171 million and $190 million in cost savings that could be put to use in deploying next-generation networks.”

If this FCC statement is true, then the wires used for Local Service in New York State only costs $95,000,000 a year. Verizon NY still has 1.9 million POTS lines. Assuming this was the ‘maintenance’ budget for these lines, the implications are staggering.

7) AT&T Claimed that It Only Cost $43 in 2003 to Maintain the Copper a YEAR and Went Up to $52 in 2009!

But it gets stranger. In 2009, AT&T quotes a study in its “IP Transition” filing to kill off the copper. This should make everyone question what it actually costs to offer the copper-based service.

AT&T 2009:

“According to one estimate, the average per-line cost of maintaining the legacy network has risen from $43 per year in 2003 to $52 per year today.”

Besides the fact that AT&T is not quoting their own data, since 2003 the expense to offer “Local per line phone service” hasn’t changed.

Where the hell did this extra billion dollars go in 2017? As the New York AG found, it was cross-subsidizing FiOS and the Wireless networks. But, in 2010, Verizon halted the FiOS deployments, except in certain areas.

We go to the Verizon press releases — Wireless cell site construction is in the wireline budget announcements.

8) Verizon’s Press Releases: Cell Sites are Part of the Wireline Construction.

Verizon NY’s press releases from 2010–2012 establishes that the wireless cell sites are part of the wired infrastructure expenditures. The Verizon 2010 headline reads:

“Verizon Spent More Than $1.4 Billion in NY’s Landline Telecom Infrastructure in 2010.”

This release clearly establishes that for the year 2010, Verizon spent $1.4 billion on wireline construction in New York State, and part of the focus was FiOS TV. But there were also 2,800 cell sites being put up as part of the wireline network.

“Deployment of fiber-optic links to wireless providers’ cell sites throughout New York as these carriers expand their infrastructure to meet ever-growing demand for wireless broadband and advanced 4G services. In 2010, Verizon deployed fiber optics to connect more than 2,800 of these sites.”

In a previous report, we detailed the number of cell sites Verizon installed in New York based on their own ‘wireline’ announcements and the costs based per cell site based on Verizon FCC filings and other sources. Almost the entire construction budget was diverted to pay for the wireless build out after Verizon halted FiOS construction.

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What this says is: Verizon New York’s wired service was charged $2.8 billion from 2010–2012 to build out the wireless networks — instead of building out the state wired utility, or even FiOS. And this happened in at least every Verizon state. Verizon stopped publishing this information around 2013. (NOTE: The difference in the Verizon NY construction expenses in the 2010 press release and the actual amount that was in the financial report was different; there were no footnotes to explain why.)

And the majority of these expenses were charged to the “regulated” local phone service category, just like 2017. There were no payments from Verizon Wireless (Cellco Partners) to Verizon NY, the state utility, for this construction.

The dumping of the construction expenses into the Local Service category and the other cross-subsidies caused losses, which were then used for rate increases. Moreover, in New York, the FiOS fiber optic deployment somehow ended up being charged to customers and was part of multiple rate increases.

9) Customers Paid “Financial Incentives” and Were the ‘Infrastructure Investor’ for Decades.

In June 2009, the NY Public Service Commission (NYPSC) granted Verizon NY the third rate increase for residential POTS, plain old telephone service, since 2005. The NYPSC press release explained that the rate increase was due to “massive deployment of fiber optics” and elsewhere it details major financial losses.

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Thus, Chairman Pai’s comment, “stop spending money to maintain yesterday’s copper networks and start building or expanding the fiber networks of tomorrow” is hollow. Customers have been paying for these “networks of tomorrow” for years and never got them.

10) Verizon NY Local Basic Phone Service Went to Over $58.00 a Month, on Average, by 2017.

Wait a second. How can the FCC claim it cost $45–50 a year while customers are being charged over $58.00 a month for this same wire, which has already been ‘written off’ (fully depreciated)?

This is what happened to the basic wired utility phone service; an overall increase since 2005 of 94%, based on the series of rate increases, and this example uses actual bills. It doesn’t include all of the increases on add-on services, etc.

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In our reports we provide another model that is based on the basic service revenues listed in the annual reports. Prices should have been in steep decline based on the actual costs of offering service. The FCC and AT&T claimed that it cost $3–5 bucks a month to maintain the copper wires and yet, the Verizon NY 2017 Annual Report shows that the average cost was $57.95 per month.

These increases happened in every state we examined. AT&T California had increases of 143% for flat rate service and a 273% increase for measured service since 2004.

Conclusion: Shouldn’t there be Refund Checks to All Those Who Were Overcharged? Shouldn’t We Stop the Wireless Cross-Subsidies?

Think of it this way: Verizon NY’s “Local Service” category was overcharged over $1 billion in construction and maintenance for just 2017, and this happened in every state, as far as we can tell. New York represents about 6–7% of the US, so we estimate the overcharging to be $10–15 billion annually, nationwide. And considering this has been going on for at least a decade…

Based on the statements by the executives, the press releases, the audit by the NY AG, and other documents, these utility budgets have been used to fund the wireless network build outs — which are part of the state utility.

But this doesn’t cover the other payments by wireless that were supposed to happen for use of these networks, such as access fees, or other perks the wireless companies are getting at the expense of the local phone customers that should be paying for upgrades of the state wired infrastructure. We note that it is impossible to know all of the details because there are no audits of these cross-subsidies.

Yet, without any data or analysis about these cross-subsidies, the FCC has decided it should ‘shut off the copper’ and move customers onto a ‘vaporware’ product that, at this point, doesn’t exist as advertised and is being used to get rid of regulations and obligations.

The FCC’s actions have no validity and they are a serious burden to everyone reading this. What we need are investigations: Local Service ended up paying the majority of expenses because — they created the Digital Divide on purpose.

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